DFC Global Corp. v. Muirfield Value Partners, L.P.
Unknown (2017)
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Rule of Law:
In a statutory appraisal proceeding, while there is no judicial presumption that the merger price is the fair value, the price resulting from a robust, arm's-length sale process is often the most reliable evidence of fair value. A court must provide a record-supported, reasoned explanation for giving substantial weight to other valuation metrics that produce a significantly different result.
Facts:
- DFC Global Corporation ('DFC'), a publicly traded payday lending company, experienced a period of rapid growth followed by significant regulatory challenges in its key markets, including the U.K., U.S., and Canada.
- These new regulations, which restricted lucrative practices like loan 'rollovers,' were expected to negatively impact DFC's future profitability.
- Beginning in the spring of 2012, DFC's board engaged an investment bank to explore a sale of the company, initiating a process that lasted approximately two years.
- During the sale process, DFC's financial performance declined, and in the autumn of 2013, it unsuccessfully attempted to refinance $600 million of its debt due to a lack of investor interest.
- The sale process involved contacting dozens of potential financial and strategic buyers, but most lost interest, with several explicitly citing the company's regulatory exposure as the reason for withdrawing.
- After DFC's management repeatedly revised its own financial projections downward, the company agreed to be acquired by private equity firm Lone Star for $9.50 per share in April 2014.
- Within a week of the merger announcement, Standard & Poor's placed DFC's debt on 'CreditWatch with negative implications.'
- Shortly after the merger closed, DFC failed to meet the financial targets for fiscal year 2014 that had been established in its most recent projections.
Procedural Posture:
- Following the merger of DFC Global Corp. with a subsidiary of Lone Star, certain DFC shareholders (petitioners) perfected their appraisal rights and filed an action in the Delaware Court of Chancery.
- The Court of Chancery conducted a trial to determine DFC's fair value.
- In its post-trial opinion, the court determined a fair value of $10.21 per share by weighting three metrics equally: the deal price ($9.50), a comparable companies analysis ($8.07), and its own discounted cash flow model ($13.07).
- DFC (respondent) filed a motion for reargument, identifying a clerical error in the court's discounted cash flow model related to working capital figures.
- On reargument, the Court of Chancery corrected its clerical error but also, at the petitioners' urging, substantially increased the perpetuity growth rate used in its model.
- The court issued a final order setting the fair value at $10.30 per share.
- DFC, as appellant, appealed the final judgment to the Delaware Supreme Court, and the shareholders, as appellees, filed a cross-appeal.
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Issue:
Did the Court of Chancery abuse its discretion in its fair value determination by giving only one-third weight to the merger price from a robust, arm's-length sale and by making unsupported upward adjustments to its discounted cash flow analysis on a motion for reargument?
Opinions:
Majority - Strine, Chief Justice
Yes, the Court of Chancery abused its discretion. While a court is not required to presume the merger price represents fair value, it must have a rational, record-supported basis for the weight it assigns to different valuation metrics. The lower court's reasons for discounting the deal price were not supported by the record or established corporate finance principles. First, the court rejected a judicial presumption in favor of the deal price, adhering to the statutory language requiring consideration of 'all relevant factors' and precedent from Golden Telecom. However, it found the Chancery's two reasons for giving the deal price only one-third weight were erroneous. The finding that markets cannot price regulatory risk is contrary to economic theory and the record evidence showing that buyers, analysts, and debt markets were all actively factoring this risk into DFC's value. Similarly, the finding that the deal price was unreliable because the buyer was a financial firm focused on an internal rate of return is illogical, as all rational buyers have return targets, and the price was the outcome of a robust, competitive process. The court further held that the Chancery's decision on reargument to increase the perpetuity growth rate in its discounted cash flow (DCF) model from 3.1% to 4.0% was not supported by record evidence, especially given the company's declining performance, missed projections, and mature industry status. Finally, the equal weighting of the three valuation methods was arbitrary and not explained with reference to the record.
Analysis:
This decision significantly clarifies Delaware appraisal law by reinforcing the evidentiary importance of a merger price derived from a robust, conflict-free market check. While stopping short of creating a formal legal presumption, the court strongly signals that such a price is likely the 'best evidence of fair value.' This ruling makes it more difficult for appraisal petitioners to obtain a value substantially higher than the deal price in arm's-length transactions by challenging the market's judgment with speculative, expert-driven valuation models. It directs trial courts to ground their valuation decisions in economic reality and the specific record of the case, rather than applying mechanistic formulas or accepting unsupported assumptions.
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